Earnings per share (EPS)

Definition

Earnings per share (EPS) measures a company's profitability by dividing net income by the number of outstanding shares. It is a key indicator used by investors to gauge financial performance.

5 Must Know Facts For Your Next Test

1. EPS is calculated as (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares.
2. There are two types of EPS: Basic EPS and Diluted EPS, with diluted accounting for potential shares from options or convertible securities.
3. A higher EPS indicates better profitability and is often seen as a sign of strong financial health.
4. Companies report EPS in their quarterly and annual financial statements under the income statement section.
5. The Price/Earnings (P/E) ratio uses EPS in its calculation to help evaluate if a stock is over or undervalued.

Review Questions

Related terms

Net Income:

The total profit of a company after all expenses, taxes, and costs have been deducted from total revenue.

Outstanding Shares:

The total number of a company's shares that are currently owned by shareholders, including restricted shares owned by company insiders.

Price/Earnings (P/E) Ratio: A valuation ratio of a company's current share price compared to its per-share earnings.